The Emergence of Finland as a Global IT Player


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The Emergence of Finland as a Global IT Player

  1. 1. This version: 22.9.2004 Finland’s Emergence as a Global ICT Player: Lessons from the Finnish Wireless Cluster Ari Hyytinen, Laura Paija, Petri Rouvinen and Pekka Ylä-Anttila, ♣ The Research Institute of the Finnish Economy (ETLA), Etlatieto Ltd Contents 1 Introduction 2 2 Foundations for an Innovation-Driven Economy 3 2.1 Small but Open Nordic Welfare State 3 2.2 Structural Transformation of the Early 1990s 5 2.3 Knowledge-Driven Growth 7 3 The Emergence of the Finnish ICT cluster 8 3.1 Competitive Domestic ICT Market 8 3.2 Roots of the Finnish ICT Cluster 10 3.3 Nokia’s Transformation 14 3.4 Smaller Players in the Finnish ICT Cluster 16 4 Drivers of Transformation 18 4.1 Creative Destruction 18 4.2 Liberalization and Reduced Financial Constraints 19 4.3 Technological Opportunity 20 4.4 Critical Standards 20 4.5 Advanced Users and Sophisticated Local Demand 21 4.6 Cooperation and Visionary Management 23 4.7 Role of Public Policies 24 5 Challenges 25 5.1 Industry Turbulence 25 5.2 Technological Uncertainty 26 5.3 Lack of lead users? 29 6 Conclusions 30 References 35 3 This research is part of the wireless communication research program of ETLA, the Research In- stitute of the Finnish Economy, and BRIE, the Berkeley Roundtable on the International Economy at the University of California at Berkeley. Financial support from Nokia and Tekes is gratefully acknowledged.
  2. 2. 1 Introduction In the early 1990s, Finland’s prospects seemed gloomy. In 1990, it was hit by the most severe economic crisis in any OECD country since World War II. Real GDP dropped by over 10 percent in just three years, and unemployment had risen to nearly 20 percent by 1994.1 At the end of 1990s, Finland however emerged as a global information and communications technology (ICT) player. Its corporate icon Nokia was at the time Europe’s most valuable company and technology en- thusiasts expected Linux, an open source operating system with Finnish roots, to replace Windows on virtual desktops. Finland was also one of the fastest growing countries in the world during the latter half of the 1990s, growing at an annual rate of approximately 5 percent.2 Finland transformed itself in less than a decade. Its remarkable recovery is in considerable part attributable to developments in the ICT sector, and one firm therein, i.e., Nokia. The company’s contribution the growth was on average more than half a percentage point. In 2000 it peaked at one and a half percentage points, when the GDP growth was 6 percent. Few know that sparsely populated Finland, which is about the size of Ger- many or the US state of New Mexico but has only 5.2 million inhabitants, went in few years from being one of the least ICT specialized countries to becoming the single most specialized one. Currently the Finnish ICT sector accounts for approx- imately 10 percent of Finland’s GDP. How did this smallish country become a success story in ICT and in wireless technologies in particular? What were the drivers of the economy’s emergence as a global ICT player? Does the Finnish ex- perience hold lessons for other countries? In the remaining of this Chapter we address these questions. In section 2, we describe briefly the foundations Finland had to take the step from a factor- to in- 2
  3. 3. novation-driven economy. In section 3, the emergence of the Finnish ICT cluster is described. In section 4 we consider the explanations for the emergence and sin- gle out some of its drivers. The Chapter continues in section 5, where we highlight some of the challenges the Finnish wireless cluster is currently facing. Section 6 concludes. 2 Foundations for an Innovation-Driven Economy 2.1 Small but Open Nordic Welfare State Entering a phase of innovation-driven development presumes the interplay of sev- eral factors. High social cohesion, a consistent and predictable policy environ- ment, sound basic infrastructure, as well as a just and efficient legislative and ju- ridical environment are often-emphasized necessary preconditions. Most of the preconditions for stable development were in place in Finland before the coun- try’s emergence as a global ICT player. Finland’s relatively stable and transparent economic and social institutions are, for example, similar to those of other Nordic countries, and had been built over centuries. It can be appropriately characterized as an open but small Nordic welfare state: it is an egalitarian country with rela- tively even income distribution and minimal class distinctions. Exports have for long been integral to the growth of the Finnish GDP per capita. During the 20th century, Finnish GDP per capita grew at an annual rate of close to 3 percent, being among the fastest in Europe. Admittedly, as compared to the countries in the vanguard of the first industrial revolution in the late 1800s, the starting point was relatively low, which in part explains the stellar performance. Many of the basic preconditions for growth were nevertheless there at that time. Institutions, such as well-functioning educational and banking systems, as well as
  4. 4. a good transportation infrastructure, were not important only in the take-off phase, but also later when the economy moved from factor- to investment-, and later, in- novation-driven stages of industrial development. Similarly, national identity and culture were strong from the early outset. After completing the liberalization of both internal and external trade by the end of the 1870s, the path for industrial growth and new business activity had opened.3 [Insert Figure 1 about here] Finland’s most important —and virtually only— endowment of natural resources, forests, proved to be the decisive factor in the take-off phase. Quick advancement in prosperity towards the end of the 1800s and in the early 20th century was based on rapidly growing exports of forest-related products —first timber and later, pulp and paper. From the late 1950s to the late 1970s, the Finnish forest industry car- ried out massive investments and transformed itself gradually into a global tech- nology leader with the most modern and efficient production capacity in the world (see Raumolin 1992). By the late 1980s, the forest sector had developed into a globally competitive industrial cluster that today provides high value-added paper grades, as well as forestry technologies and consulting services (Hernesniemi, Lammi, and Ylä-Anttila 1996; Ojainmaa 1994; Rouvinen and Ylä-Anttila 1999). The small home markets of Finnish firms have fostered the firms’ incentives to specialize and seek foreign markets. It is therefore not surprising that exporting sector is large: Today, the share of exports in GDP is close to 50 percent. 4
  5. 5. 2.2 Structural Transformation of the Early 1990s Numerous structural changes characterize the history of the Finnish economy. The rise of the manufacturing industries as the engine of growth during the 19th and early 20th century and the changes in the relative importance of the different man- ufacturing industries over time are prime examples of such structural changes. So are the industrial changes that World War II and the associated war reparations to the former Soviet Union induced in Finland. The structural change that preceded the economy’s emergence as a global wireless player, was, however, unusually profound. Between 1990 and 1993 Finland ran into an unprecedented economic crisis, induced by a number of coincidental and structural factors. These included, for example, a downturn in the nationally vital forest-related industries, disruption in the country’s sizable eastern trade due to the collapse of the Soviet Union, a spec- ulative bubble in the domestic securities and real estate markets fueled by uncon- trolled credit expansion and favorable terms of trade, and mismanaged financial liberalization, which eventually led to credit crunch and excessive private sector indebtedness (Kiander and Vartia 1996). In addition to these immediate reasons for the recession, also rigidities in economic and political systems and corporatist structures contributed to an economic dead-end. The deep recession initiated a structural transformation. Widespread corpo- rate restructuring and bankruptcies modified the economy’s industrial structure, and the banking crisis that coincided with the economic recession triggered a fun- damental structural change of the Finnish banking system (see, e.g., Hyytinen, Kuosa and Takalo 2003). [Insert Figure 2 about here]
  6. 6. The change in the 1990s in Finnish industrial structure and exports was unique both nationally and internationally. In less than a decade, electronics became the most important single branch in production and exports. The Finnish industrial structure that was previously raw material-, capital-, energy-, and scale-intensive, is now primarily knowledge-intensive. The recession also led to a clear shift in policy thinking. Greater emphasis was put on long-term microeconomic as opposed to short-term macroeconomic policies in an acknowledgment that the foundations of sustained national competi- tiveness are largely created at the micro level —in firms, financial institutions, and various innovative policy agencies. Networking and cooperation in society in general, and in the business sector in particular, was acknowledged as important in developing innovations. To ad- vance this goal, the government assumed the role of a facilitator and coordinator. The setting for industrial policy design was characterized by intensive and infor- mal communication between the government, the industry, academia and the labor market.4 Its objective was to build and enhance businesses’ operating and frame- work conditions, and not to provide heavy subsidies or other direct government support. A number of forums were founded to promote interaction between differ- ent interest groups of the society, the most prominent of which was the Science and Technology Policy Council, chaired by the Prime Minister. Industrial associa- tions, acting as influential intermediates between the industry and the public sec- tor, have been another institution with a salient role in the Finnish policy arena.5 The recession of the early 1990s was a watershed between the investment- and innovation-driven stages of national development. A prime example of this change and the change in policy thinking was how public R&D funding changed 6
  7. 7. in the midst of the recession: It rose at a time when virtually all other public ex- penditures were cut. The country’s R&D intensity grew rapidly as also the busi- ness sector increased expenditures on innovative activity. Today, Finland’s rela- tive R&D intensity —the share of the gross domestic research and development expenditure (GERD) of GDP— is among the highest in the world (3.4 percent in 2003). [Insert Figure 3 (= from WEF paper’s figure 3, only panel no:s 1 & 4)] The European integration process fueled the shift in policy that the econom- ic crisis of the early 1990s initiated. Finland joined the European Union in 1995 and, unlike the other Scandinavian countries, adopted the euro from the outset. For Finland, the integration meant, among other things, that the scope for national macroeconomic policies was considerably reduced. 2.3 Knowledge-Driven Growth Besides investments in R&D, a key factor behind Finland’s step to an innovation driven economy is a strong commitment to education. Due to increased invest- ments in the education system, by the late 1980s, younger generations of Finns were among the most educated in the world. Education that would enhance tech- nological change was prioritized in the policies of the 1960s and 1970s. Among the OECD countries, the Finnish educational system lags behind only the Korean and German systems in terms of its relative emphasis on natural sciences and en- gineering. [Insert Figure 4 about here]
  8. 8. During the most intensive ICT-driven growth period the supply of skilled labor ran short in face of the industry’s requirements. The government reacted by in- creasing the number of openings in higher education institutions: during 1993-98 the total intake in universities nearly doubled, and in polytechnics it nearly tripled. In early 1998, the government adopted a program aimed at further increasing ICT education in 1998-2002. However, educational resources allocated to science universities did not match the sizeable growth in enrollment, owing to the retrenchment persisting in public spending. Yet, the tertiary level of the education system suffered relatively little from the government’s belt-tightening. Its share of total expenditure on edu- cation exceeded the OECD average even during the deepest recession (Virtanen 2002). During the same period, the budgeting system of higher education became more demanding for the universities. It was shifted towards management by re- sults, and R&D funding in universities was based on competition for both public appropriations and external (i.e., private) funds. It is not, however, only graduate level science and technology education that matters; a high general level of education is equally important for adopting and utilizing new technologies. Basic education continues to be the focal point of the Finnish educational system, as suggested for example by the recent PISA study (OECD 2001). 3 The Emergence of the Finnish ICT cluster 3.1 Competitive Domestic ICT Market As the worldwide deregulation and liberalization boom started in the 1990s, Fin- land already had a relatively competitive and diverse telecommunications opera- 8
  9. 9. tors and equipment markets. The origins of this exceptional market structure can be traced back to the Telephony Decree of the Finnish Senate in 1886, which dis- tributed numerous private operator licenses in order to circumvent Russian tele- graph regulations. Upon gaining independence in 1917, an additional public tele- phony operator (PTO) and regulator was established to operate the telegraph and military telephone network left behind by the Russians.6 In the 1930s there were over 800 private telecommunications operators in Finland. Even today there are some 40 significant operators. From the outset, Finnish telecommunications equipment markets were open to foreign suppliers. Unlike in countries with an equipment manufacturing monopoly, e.g., France, Germany, and Sweden, there was no public interest in protecting domestic supply in Finland. Despite catching up gradually with foreign suppliers in technical knowhow, the domestic equipment manufacturing, still in the bud, was not able to meet local demand. Independent operators were free to choose among different suppliers, and thereby put small local manufacturers un- der competitive pressure. Thanks to its small multi-operator market, Finland became a test market for the latest technology. In order to integrate different manufacturers’ network equipment, operators had to develop technological expertise, which was later ex- ploited by the emerging domestic equipment industry. Private operators’ interest in state-of-the-art technology was fueled by the threat of being taken over by the PTO-regulator in case of underperformance. The tension between the public and private “camps”, originating from the early days of telephony, was a source of dynamics that finally culminated in the early dereg- ulation of the telecom market at the turn of the 1990s. The long tradition in a “dual” market structure provided a basis for balanced competition from the outset
  10. 10. of liberalization: transitory regulation to induce equitable competition between the incumbent and the entrants was not needed. 3.2 Roots of the Finnish ICT Cluster Finnish telecommunications equipment manufacturing was initiated around 1920 in three separate organizations that were finally merged in 1987, after a complex and eventful process, under the management of one company, i.e., Nokia. The original companies had somewhat different focus areas at the outset: Salora con- centrated on the resale of radio and TV sets, Suomen Kaapelitehdas focused on cables and electricity production, and the radio laboratory under the Ministry of Defence, later named Televa , started with military radio systems. Fervent engineers, often objects of suspicion and opposition by conservative colleagues and managers, worked on applications of radio technology on the side- lines of main business activities. Foreign license and resale agreements provided valuable knowledge on the state-of-the-art technologies that was gradually en- hanced by own experiments and research activities. In 1963, a call for tenders by the Finnish army for a battlefield radio spurred companies to give physical expression to their accumulated expertise. Ultimately the army did not have the resources to purchase the system, but the prototypes served as the forerunners of commercial portable phones. Also state agencies, e.g., the telecommunications administrator, the state railways, and the coastguard, with their demanding communications requirements had major influence on the com- panies’ product development efforts.7 The Auto Radio Puhelin (ARP, Car Radio Phone) network was introduced in 1971 as the country’s first mobile telephone network providing nationwide ser- vice. It provided good geographical coverage but was not technologically sophis- 10
  11. 11. ticated. In the mid 1970s the service had some 10 thousand subscribers, and Finnish radio phone manufacturing gained a major market share across the Nordic countries. Although ARP did not turn mobile communications into a major busi- ness, it provided experience and customer interfaces for companies such as Nokia, Salora, and Televa. It also indicated that there was commercial potential in mobile services. In network systems, development was intensive and progressive but yielded little sales revenue. In fact, it was other electronics applications, e.g., TV sets, computers, and industrial process control systems that dominated the commercial electronics offering up until late-1980s. The adoption of semiconductor tech- niques in the 1960s served as the basis for electronics development. Coupled with pioneering product development in digital transmission and digital signal process- ing, it produced knowhow that proved pivotal for later success in digital telecom- munications. The development of the analog Nordisk Mobil Telefon (NMT, Nordic Mo- bile Telephone) standard in the 1970s was a highly valuable outcome of the tradi- tional cooperation of Nordic telecommunications administrators and industry. It aimed at creating a Nordic market for mobile telephony and inducing competition. The standard development project was open to third-country suppliers as well. Openness promoted competition in network equipment and handsets. Advanced features such as roaming were included, and fortunately, the diffusion-promoting “caller pays” practice was also adopted. In the early 1980s, the Nordic countries formed the largest mobile commu- nication market worldwide in terms of the number of subscribers. Mobira, a joint venture of Nokia and Salora, supplied the first NMT portable phones.8 In contrast, Finnish companies were neither ready nor willing to supply network technology at
  12. 12. the starting phase of the NMT project. Eventually, under pressure from PTO, which was motivated by the need to curb Swedish Ericsson’s market power and equipment prices in general, Mobira, and later Tele-Nokia, started to manufacture network equipment (Palmberg 2002). [Insert Table 1 about here] In 1988, the telecommunication authorities of the European Community published the Groupe Spécial Mobile (GSM, Digital Global System for Mobile Communication) standard. The technological challenges of the GSM were fore- most related to the digitalization of radio transmissions, and the exponential in- crease in the complexity of the signaling and control software. These were fields in which Nokia had accumulated competencies with its customers in, e.g., the ad- vanced banking sector starting in the 1970s, and consequently this knowhow served as an entry ticket to the standard development project (Palmberg and Mar- tikainen 2003).. At the same time, Nokia reorganized its telecom divisions to cater to the en- visioned GMS-based growth in the cellular systems, and to contribute to the goal of making the deadline for the inauguration of the GSM Service in Europe in 1991. The tight deadline was met in Finland through the world’s first GSM call in June 1991, even though the pan-European inauguration of the service was delayed due to technical problems. Nokia and Ericsson were among the first to adopt GSM, which eventually became almost universally accepted —with the major ex- ceptions of the United States, Canada, and leading Latin American countries. Re- cently GSM has also gained ground in these markets. 12
  13. 13. On the operator side, PTO had monopoly over the NMT service. The lucra- tive mobile market made the private camp to apply for a second license, without success. In 1988, it decided, on the basis of a regulatory loophole, on constructing a mobile network without a national license, and banked on ultimately getting one. The private venture chose the newly developed GSM standard that was not yet in commercial use anywhere in the world. In 1990, the license was granted to a newly-established company, Radiolinja – after an intensive political debate on the viability of parallel networks in a small country, while the huge socio-eco- nomic opportunity involved in the new market was not realized. The digital mo- bile service was commercialized next year with Nokia, which thus made its global GSM premiere with Radiolinja’s network. PTO followed suit in a partnership with Ericsson. The mobile market entrant started to erode mobile service pricing, and soon Finnish mobile services were the least expensive in the world. Together with more affordable portable phones, gradually replacing common auto phones, mobile communications was adopted by the masses. Although the foundations of domestic equipment manufacturing were laid in the 1920s, up until the 1980s, foreign manufacturers dominated the market. Dur- ing the 1970s and 1980s, Finland was advancing rapidly in digital and mobile technologies. Nokia participated in these developments and since the 1970s, it has become a central force in the consolidation of the industry. By the late 1980s, the bulk of the Finnish telecommunications equipment industry had merged into Nokia.
  14. 14. 3.3 Nokia’s Transformation The merger of Nokia (originally a wood-grinding mill), Suomen Kaapelitehdas (Finnish Cable Works), and Suomen Gummitehdas (Finnish Rubber Works) in 1967 may be seen as the birth of the current Nokia Corporation. Although the for- est-based company lent the name, the cable company provided the core knowl- edge base to the new entity: in 1960 it had established an electronics department reselling computers, providing computing services, and also manufacturing some its own electronic devices. It also assumed an important role in educating its own staff —and Finns more generally— on digital technologies. Nokia was still pursuing a conglomerate strategy in the 1980s and made several sizable acquisitions in consumer electronics (i.e., televisions such as Swedish Luxor in 1984 and German Standard Elektrik Lorenz in 1987), informa- tion systems (e.g., Swedish Ericsson Information Systems in 1988), and other fields not directly related to telecommunications.9 Indeed, Nokia was the biggest manufacturer of personal computers and color TV-sets in the Nordic countries and was among the top 10 in Europe. This conglomerate strategy, together with managerial and ownership prob- lems, caused —along with the early 1990s recession— a deep crisis. The compa- ny almost went bankrupt in the early 1990s, primarily as a consequence of its overly ambitious and costly acquisition and internationalization strategy. In the event, there were even fruitless attempts to sell the company to Ericsson and Siemens. Jorma Ollila became the CEO in 1992. Under his leadership, activities outside mobile communications were divested. The process was completed by the late 1990s. 14
  15. 15. In the mid 1990s, Nokia faced a logistics crisis and suffered from a mis- match between product mix and the market demand. These problems led to a ma- jor revision in organizational structure. [Insert Figure 5 about here] With the exception of UK-based Technophone, Europe’s second largest mo- bile phone manufacturer at the time (in 1991), Nokia has not made major foreign acquisitions in communications. In fact, it retreated from its acquisition strategy almost completely after the early 1990s. But alliances were important from early on: in handsets, Nokia established joint ventures with American Tandy, and did private labeling with Tandy-owned Radio Shack, AT&T, and others; on the net- work side, it initially partnered with Alcatel (France) and AEG (Germany) to pro- vide GSM solutions.10 Although Nokia’s market share has recently not grown, with about thirty percent it is the market leader in mobile handsets and also one of the dominant players in mobile network infrastructure equipment. It has been riding the wave of exploding global mobile telecommunication markets, fueled by worldwide dereg- ulation in telecommunications. Thanks to its narrowly defined and globally orien- tated strategy, it has been able to meet the market challenge somewhat better than its closest competitors. Furthermore, the management has been able to build an in- novation-driven culture and supporting organizational structure, flexibly exploit- ing both internal and external networking – yet retaining, in contrast to its main competitors, most of its manufacturing in-house. [Insert Table 2 about here]
  16. 16. In the 1990s Nokia’s challenge was to manage rapid organic growth; in the new millennium the challenge has been to manage its end. Nokia’s growth was clearly aided by its agility and lack of bureaucracy. Although the company has Finnish roots and its executive board is mainly populated by Finns, Nokia’s orientation has been distinctively global. While Nokia has had its share of problems and challenges as well, what seems to set Nokia apart from many other gigantic corporations is its ability to re- act quickly and improvise in a moment of crisis. The recent intense competition for market shares in handsets and Nokia’s strategic reactions to it, echo in our view this conclusion. 3.4 Smaller Players in the Finnish ICT Cluster In ICT, laggards rarely catch up, let alone leapfrog, the leaders (Koski, Rouvinen, and Ylä-Anttila 2002). Originally ICT-specialized countries therefore tend to be- come more so. Finland is an exception to this rule. During the 1990s, it went from being one of the least ICT-specialized industrialized countries to becoming the single most specialized one.11 The development is not entirely driven by Nokia, for there is more to the Finnish ICT cluster than one highly successful company. The broadly understood Finnish ICT sector (or cluster) —from digital content provision and packing via network infrastructure equipment manufacturing and operation to end-user termi- nals and portals— is comprised of 6,000 firms (Paija and Rouvinen 2003), includ- ing 300 first-tier subcontractors of Nokia (Ali-Yrkkö 2003). The impact of the ICT cluster on the Finnish economy can hardly be exag- gerated. In the 1990s its GDP share rose from 4 to 10 percent. 12 ICT has indeed 16
  17. 17. become the country’s third industrial pillar, diversifying Finland thus away from the traditional metal and engineering as well as forest-based sectors. [Insert Figure 6 about here] Yet, the phenomenal growth of the cluster is mainly attributable to Nokia that ac- counts for some two thirds of the total turnover of the domestic and foreign ICT companies operating in Finland. As the by far biggest company in the whole country, Nokia accounts for one-fifth of the country’s total exports and over 3-4 percent of its GDP. But its role is even more important in strategically important activities like R&D and internationalization of business. Nokia’s share in total business sector R&D is 43 percent, and of total national research and development some one third. Hence, as a performer of R&D, Nokia is bigger than the whole Finnish university sector. More than 60 percent of Nokia’s R&D (€3 billion in 2002) is conducted in Finland. Nokia employs 20,000 people in Finland, of which more than half are in R&D. [Insert Figure 7 about here] Finland is quite dependent on Nokia, but at least now the Finnish economy has a second major pillar alongside the traditional forest-related industries. Should any- thing go wrong, the country has a proven ability to adapt. As compared to a de- pendence on natural resources such as oil, it seems plausible to argue that the knowledge accumulated in ICT-related activities could be more easily applied elsewhere. In any event, a small country can hardly ever hold a well-diversified portfolio of internationally competitive business activities.
  18. 18. Although other Finnish ICT companies are gaining ground in global mar- kets, there have not been major breakthroughs in broader ICT market segments. Indeed, regarding, for example, the substance and sophistication of Nokia’s com- puter-related activities started among the early-movers, coupled with the fact that Finnish universities have been hatcheries of several pathbreaking Internet-based inventions, the weak commercial success of the Finnish ICT sector outside wire- less communications is somewhat disappointing.13 However, ethical and social, rather than commercial motives have characterized much of the Finnish innova- tion in the Internet domain.14 Such firms as Ericsson, Fujitsu, IBM, HP, and Siemens have established R&D units in Finland, which has been interpreted as a sign of the viability of its ICT cluster. However, there have been recent indications of other locations, such as South Korea, challenging Finland’s leading position as a pioneering ICT mar- ket and, thus, an inspiring technology development environment. 4 Drivers of Transformation 4.1 Creative Destruction An economy’s historical developments and macroeconomic environment provide the general conditions for its economic development and microeconomic restruc- turing. For Finland, the recession of the early 1990s provided a clear break from the past. This event fostered pragmatism and a straightforward culture in both pol- itics and business. Faced with the deep recession, the Finns simply could not af- ford inflexibility or bureaucracy. They had to adapt to the challenges imposed by the worsening economy. Thanks to its stable political environment and social co- hesion, political institutions remained functional, and thus the necessary policy adjustments were made even during the crisis. 18
  19. 19. Vast unemployment in the 1990s gave the emerging ICT cluster a large re- cruitment pool necessary for its expansion. The public educational system also re- sponded to the content and volume needs in ICT-related education. Furthermore, the collapse of the eastern trade relaxed resource constraints within firms, which could then be targeted to the development of ICT (including GSM) and to the ex- pansion that followed. 4.2 Liberalization and Reduced Financial Constraints The liberalization of global markets for goods, services, capital, and technology, initiated by developments in the United Kingdom and the United States in the late 1970s, led to a globalization boom in the mid 1980s. As a result of this globaliza- tion, Finnish companies gained access to new markets and became increasingly exposed to global competition. Lack of capital has been an Achilles’ heel of the Finnish economy. The lib- eralization of capital markets in the 1980s and early 1990s relaxed capital con- straints, and especially larger Finnish companies gained direct access to foreign investors. There was a huge influx of capital to Finland in the mid 1990s, and for a couple of years the Helsinki Stock Exchange was the most internationalized one in the world, as measured by market value owned by foreigners. The Finnish financial system moved away from a bank-centered system in mid 1990s, when the stock market grew and intermediated debt finance contracted as a result of the banking crisis. This development was more visible in Finland than for example in the other Nordic countries, where similar structural changes were also taking place. Changes in creditor and shareholder protection also con-
  20. 20. tributed to the development of the Finnish financial system (Hyytinen, Kuosa and Takalo, 2003). Contrary to the Israeli case, smaller Finnish companies have not made initial public offerings in NASDAQ or other foreign markets. They have nevertheless benefited from the rapidly increasing availability of venture capital finance since the early 1990s (Hyytinen and Pajarinen 2003). The enhanced availability of ven- ture capital has been especially important for small Finnish ICT firms, for they ap- parently have a revealed need to maintain conservative leverage ratios (Hyytinen and Pajarinen 2004). 4.3 Technological Opportunity Digitalization was a major technological breakthrough in voice and data storage, processing, and transmission. It was important for Finland, as it provided an op- portunity for new players with no experience or vested interests in computing or communication. Finland had sufficient expertise in digital technologies at large and in telecommunications in particular, both of which were absolutely vital for the big GSM breakthrough. Radio technology, in addition to a profound understanding of telecommuni- cations, was one of the prerequisites for building a mobile telephone system. Uni- versity-level education in radio technology had started in the early 1920s. As sug- gested above, it “lurked in the shadows” in many Finnish firms well before it had commercial applications. 4.4 Critical Standards Telecommunications standardization in the Nordic and European contexts may be the single biggest explanatory factor in the Finnish ICT success. Finland was an 20
  21. 21. early adopter of first NMT and then GSM, both of which eventually proved to be the “winning technologies” in their eras. Early on, NMT provided critical mass and relatively high penetration rates, which led to early recovery of development costs as well as accumulation of hands-on knowledge and scale economies. Many sorts of network benefits in both production and consumption also accumulated. Upon the transition to digital technologies, Nokia bet heavily on GSM as the second-generation (2G) standard, which eventually commanded three-quarters of the worldwide user base. Nokia managed to capitalize on its early lead in both GSM networks and handsets. The fact that mobile telecommunications standards were agreed beforehand rather than being completely or in part determined by market forces, clearly aided entrants and market creation. The settlement of these and subsequent standards was in part based on demonstrations, where the benefits of a given technological solution could be shown in an open competition. Nokia has been quite successful in these competitions and thus has been able to influence the formation of these standards. 4.5 Advanced Users and Sophisticated Local Demand During and prior to the cold war era, telecommunications operation was consid- ered a natural monopoly and equipment manufacturing was largely kept national for strategic reasons. Since then, both operation and equipment markets have been almost completely deregulated and liberalized. Finnish ICT firms had ample expe- rience operating in a competitive environment with diverse customer needs, un- like many of their international competitors. Besides having a history of telecom-
  22. 22. munications competition that dated back over a hundred years, Finland was also some three years ahead of other industrialized countries in taking the final steps towards completely deregulated communications markets. In mobile telecommunications in particular, deregulation brought about ea- ger “second-tier” operators and service providers that wanted to deploy new net- works rapidly and with a minimum of technical problems. Former monopoly op- erators were forced to respond by upgrading their networks. Competition, and re- sulting lower prices, fueled demand, which in turn led to further investments. Thus, the industry was indeed in a virtuous cycle in the 1990s.15 Scandinavians seem to be accustomed, and therefore quite willing, to test new technologies. In the early years of mobile telecommunications, new genera- tions of phones always caused quite a stir and “forced” many users to shop for an upgrade. Fortunately, customer needs in these markets preceded those elsewhere, thus giving somewhat of a first-mover advantage to the Scandinavian firms. ICT penetration rates have for example been high. Finland and Sweden are also lead- ers in certain types of ICT usage, such as online banking and mobile payments. Thus, the Scandinavian market was a rather happy marriage of technological com- petence in both production and use. In handsets Nokia was among the first to offer curvy “pocket-fitting” de- signs with integrated antennas, screens with sufficient contrast and size for com- fortable reading, end-user customization such as exchangeable covers, and down- loadable ring tones and logos, as well as entertainment such as off- and online games. While all of these seem obvious now, it took surprisingly long before they became part of the standard setup. Nokia’s expertise in networks was considerably enhanced by technological- ly advanced domestic operators who were interested in the latest gadgets but at 22
  23. 23. the same time quite price conscious and always benchmarking domestic offerings against foreign competition. Interestingly, the strong Finnish forest cluster with roots in traditional fac- tor-driven industries has lately found interfaces with the knowledge-driven ICT cluster, evidenced by the integration of ICT into pulp and paper making processes and maintenance services. Furthermore, the global consolidation in pulp and pa- per, as well as in other traditional industries, has spawned new ICT markets as the demand for electronic means of integrating geographically dispersed activities has grown. 4.6 Cooperation and Visionary Management Competition brings about efficient and lean organization. Somewhat paradoxical- ly, cooperation has been equally important for the success of ICT in Finland. In- deed, international comparisons (EU 2000; OECD 1999) suggest that intense in- ter-organizational cooperation is one of the essential features of the Finnish na- tional innovation system. As shown above, a diverse set of Finnish communications expertise was eventually merged into Nokia. In the 1980s the corporation was relatively similar to some other Finnish conglomerates, but in the 1990s it transformed itself to something exceptional. Despite its roots, Nokia was able to give up its forest-re- lated activities and seems to have realized quite early that the Soviet trade was best treated as a “cash cow” used to finance developments elsewhere. Focusing on mobile communications was a rather bold move on Nokia’s behalf in the early 1990s, but it has paid off handsomely. Although Finns are often accused of being too engineer-oriented, Nokia has been less so than its closest competitors, Swedish Ericsson and US Motorola. This
  24. 24. may be due to its historically somewhat broader customer interface in both the op- erator and end-user side, Nokia’s early lead in the handset market, and early in- dustry developments. Nokia started to emphasize design and branding before the competitors —it anticipated that the mobile phone was going to become a mass- market consumer product.16 It seems that from early on Ericsson has envisioned itself as a system company, while Nokia always identified itself as a handset com- pany, although at times the network side commanded a large share of the turnover. As compared to Ericsson and Motorola with long traditions in the field, Nokia was clearly the challenger, and thus it had to be humble. 4.7 Role of Public Policies The institutionalization and strengthening of science and technology policies be- gan in the early 1960s. Important changes that contributed to the knowledge-driv- en growth and expansion of the ICT sector took place throughout the following decades. The main target of these policies was to strengthen the science and tech- nology base of industry (Lemola 2002). In the beginning of the 1980s, technology policy became increasingly tar- get-oriented and systematic. The National Technology Agency (Tekes) was estab- lished in 1982 to coordinate public R&D support and related efforts, such as na- tional technology programs. Technology transfer and commercialization of re- search results were emphasized. Tekes and its programs became important instru- ments for implementing policies. The focus of the new agency’s operations was information technology. In fact, two extensive information technology programs had already been initiated before Tekes was established. Towards the end of the 1980s, a more systemic view on policymaking was adopted, and in the early 1990s, the deep recession fostered the relative impor- 24
  25. 25. tance of micro-economic policies. In the 1990s, the Science and Technology Poli- cy Council, a high-level body advising the Cabinet and the President on science and technology matters, introduced the national innovation system as a basic framework for policymaking. Innovation was seen as having a systemic character, contrary to the traditional linear innovation model. This enhanced cooperation be- tween various policy agencies and improved possibilities for making use of emerging complex ICT. The systemic view also emphasized the role of education in adopting, diffusing, and utilizing new technologies (see Georghiou, Smith, Toivanen, and Ylä-Anttila 2003). 5 Challenges 5.1 Industry Turbulence There was an over-investment in virtually all ICT-related activities in the late 1990s. In part these were driven by one-time events, such as deregulation and lib- eralization in major markets, the Y2K computer glitch, the introduction of the euro, and commercialization of the Internet —not to mention the new economy bubble. With the benefit of hindsight it is easy to say that the market participants should have anticipated some leveling-off in demand. But probably nobody could have anticipated the near collapse of the ICT market. The bust market has taken a heavy toll on ICT companies, both in Finland and abroad. Not all of the current businesses will live to see the next bull market. The bust market has not changed the fact that real prices of digital computing power and communications are dropping at double-digit annual rates and that new applications of ICT are discovered every day. The Finnish ICT cluster benefited disproportionately from these trends prior to the turbulence. The challenge to Fin- land is that other firms and emerging wireless clusters elsewhere with no present
  26. 26. technological backlog may well be in a good position to seize the opportunities that the recent industry turbulence has brought about. 5.2 Technological Uncertainty All-IP World One of the key challenges for the Finnish ICT cluster is the on-going convergence of voice and data communications, information systems, consumer electronics, and digital content that is being tailored for these various channels and devices. Mobile Internet or perhaps more appropriately “whatever, wherever, and however desired,” will introduce a new playing field with diverse and seemingly different players. Indeed, participants in the respective industries are already competing in both handsets and networks, and this tendency will only strengthen as Internet protocols (IP) increasingly form the basis for all electronic communication. Over time the focus on equipment weakens as it becomes more diffused, and shifts to applications and content. Finland has two major weaknesses in the all-IP future. First, it has little clout outside mobile telecommunication equipment. Thus, it cannot to a signifi- cant extent leverage market power in other domains as the industry is being trans- formed. Second, the all-IP world is not likely to favor the integrated and closed ar- chitectures and business models of the telecommunications world. The first prob- lem can be addressed by acquiring a broader set of competencies and forming al- liances with the leaders of the respective industries. The second problem can only be addressed by actually competing in the ever more open and fragmented operat- ing environment. 26
  27. 27. Next Generation Networks and Future Mobile Cultures Another challenge is, as we all know, related to how the uncertainty over the next generation networks is resolved. In the mid 1980s, the International Telecommu- nications Union (ITU) assumed an active role in the introduction of the next gen- eration (third, 3G) standards. Although ITU pushed for one worldwide standard, eventually three became accepted in International Mobile Telecommunications (IMT-2000) guidelines: W-CDMA (better known as UMTS, Universal Mobile Telecommunication System), CDMA2000 (promoted in particular by American Qualcomm) and the Chinese TD-SCDMA. Originally ITU’s decision was consid- ered a win for the Nokia-Ericsson camp promoting UMTS, but early market de- velopments seem to suggest that CDMA2000 is progressing faster than expected. Europe attempted to maintain its lead in mobile telecommunications by pushing for rapid deployment of UMTS. In many European countries radio spec- trums for 3G operations were auctioned for over 100 billion euros in total. It soon became clear that deployment and diffusion would be slower, network building costs higher, and expected revenue per user lower than the licensees had anticipat- ed. While the radio spectrum auctions generated large immediate returns to some governments, the long-term effects were unanticipated. The rules of the auction explicitly prohibited secondary trading and defined how, when, by whom, and with what standard the 3G networks were to be set up. Thus, the operators were not making a technology or even a business decision—they were deciding whether or not they wanted to be in the (mobile) telecommunications business; this was a question of their very existence. Currently the operators’ indebtedness due to auctions, combined with the bearish financial market, is holding back the deployment of 3G.
  28. 28. In any case, by making a public commitment to one technology over anoth- er, the auctions did away with technology neutrality, which is often considered one of the golden rules in technology policymaking. The unanticipated long-term effects of auctions on the 3G rollout have recently sparked requests for public ac- tions to “reverse the damage”. The main benefit of the first generation digital (as compared to analog) sys- tem was improved voice quality. The key promise of 3G is improved data com- munication. So far voice has been the key driver of mobile communication, al- though data is gaining ground. Upon bidding for a spectrum, the operators seem to have assumed a rapid and large shift from voice to data. This shift is indeed taking place, but from the European point of view, somewhat unexpectedly. Whereas Europeans seem to have assumed that the mobile Internet would be an extension of mobile telecommunications, the American route of extending wire-line data communications architectures to wireless local area networks (WLANs, also known as Wi-Fi or 802.11x, where x refers to the incarnation) seems to have an early market lead. Arguably, a combination of WLAN and an intermediate generation (2.5G, e.g., GPRS, general packet radio service) mobile telecommunications system hav- ing the “always on” feature could be used to reach the goals of 3G. WLAN never- theless has a number of unsolved problems such as control for log-in and access rights, payment, and coverage, which have already been solved in 3G. It is too early to say how the market will unfold, but most likely 3G and WLAN will coex- ist with in-between roaming. In a sense, the discussion of 3G vs. WLAN is also about how the wireless culture evolves. Will a typical user eventually require broadband access at all times and locations for streaming video and similar applications, or is s/he going 28
  29. 29. to be happy having hotspots in areas of peak demand and limited communication ability elsewhere? And perhaps more importantly, for what and how much is s/he willing to pay? For the majority of us, the office or home desktop computer remains the most important means for storing the flow of our lives. A number of small elec- tronic appliances, mobile phones, along with personal digital assistants, electronic organizers as well as lap- and palmtops, are trying to take over the personal com- puter in this respect and to become all-encompassing “personal trusted devices,” perhaps even replacing our wallets and passports. The early experiences with Wireless Application Protocol (WAP) suggest that in addition to how well the technology works, pricing of services can matter a great deal: When the technology does not meet customers’ expectations, the de- mand is likely to be price elastic (see Gao, Hyytinen and Toivanen, 2004). Depending on the actual configuration, Finland may stay on the cutting edge and continue to serve as a useful testing ground for new applications, or it may have to play catch-up with respect to some other lead-user concentrations such as South-Korea, China, India or some US regions. Individuals, both as consumers and business representatives, will ultimately decide who wins in the market place. 5.3 Lack of lead users? A considerable challenge for the Finnish wireless cluster may be lack of, or wrong kind of, lead users on its domestic market. Demanding lead users can to a signifi- cant extent drive innovation, or at the very least, provide important and immediate feedback from the market. Both our analysis, as well as that by Berggren and Laestadius (2003) and Richards (2004) emphasize the importance of local demand for innovation and the role of close-by lead users as an explanation for Finland’s
  30. 30. and Sweden’s emergence as global ICT players. Nordic countries or Europe with its aging population can probably serve as a partial test bed during an era when the key growth markets in wireless are in Asia, in China in particular. Finnish or, more generally, European corporations are not lead users either. Translating technical preconditions into improved performance seem to have been challenging for the European corporate sector. In Finland, the picture is not very bright either: Several studies indicate a gap – albeit not exceptional in the interna- tional context (see Dutta et al. 2003) – between the Finns’ technical capabilities and effective use of ICT.17 Although in many respects Finland is also an advanced user of ICT, it nevertheless seems that future leaders will be elsewhere. This is, if anything, alarming from the perspective of the Finnish wireless cluster, and its smallest players in particular. 6 Conclusions The performance of the Finnish economy in the 1990s was remarkable. It looked as though the economy had found a unique way to combine high social security, dynamism, and growth. Policies contributing to the Finnish success story were equated with a new economic model for the information society. But building competitive advantages takes time. There was no master plan to restructure the Finnish economy and industry; rather, an array of policy measures was working to the same end over an extended period of time (see Georghiou et al. 2003). Upon its birth as an independent nation, Finland had a somewhat disadvan- tageous starting point. It was lagging behind the rest of Europe in industrial devel- opment after World War II. It consciously upgraded its skills and competencies and in half a century caught up with the leaders. Now it is slowly learning that it is considerably harder to retain a leading position. 30
  31. 31. Decades of a relatively stable political and economic environment, as well as a shared national vision on how to build the country, have been important fac- tors in Finland’s success. The most recent push in the country’s development nev- ertheless involves many coincidental factors and good timing. Thus, Finland has been fortunate, and there is no point to try to deny that. As shown above, the confluence of several factors led to the ICT boom in Finland. The country itself provided particularly fertile framework conditions and had accumulated a great deal of ICT-related expertise. Due to unfavorable macroeconomic shocks, it had resources available and a desperate need for some- thing new. Digitalization presented a technological opportunity. Furthermore, the country had early exposure to two successive generations of winning standards. Finnish firms had already “laboratory tested” competition when deregulation cre- ated a wide open world market. On top of this, there was a company that had the vision and a strategy to make it happen. These factors, combined with quite a few lucky breaks, served to put Finland out in front of the pack. While in hindsight the Finnish public policies of the 1990s were successful, the “Finnish miracle” can only be partially explained by public policies pursued in the 1990s. The necessary policy changes had already been made in the 1980s, with some having come as early as the 1970s. For example, the high-road strategy of innovation and technology was initiated in the 1970s and 1980s. In the 1980s, long before the rise and fall of the “new economy,” Finnish technology policy be- gan to give high priority to ICT. These policies were continued in the following decade and they undoubtedly contributed to the success story of the 1990s. Finnish R&D investment and networking between public and private actors rose to new heights.
  32. 32. However, policies pursued since the early 1990s have had their role as well. There was a major shift in priorities as a consequence of European integration and changes in comparative advantages of the economy; focus shifted from short-term macroeconomic to long-term microeconomic policies. For Finland, the increased emphasis on microeconomic and especially inno- vation policies has in many ways been a successful choice. These new policies are based on indirect measures aimed at influencing firm behavior. Policies concen- trate on rectifying market failures, promoting competition, and improving frame- work conditions. These types of enabling policies fit well to the economic envi- ronment of the 21st century. The key priorities today are innovation policies and policies for enhancing the functioning of capital markets. There are nevertheless major challenges in the horizon. The Finnish ICT cluster remains highly specialized in mobile communications despite the fact that its scope has broadened in recent years. Although smaller Finnish companies have made efforts to decrease their dependency on their key customer, in many cases their fortunes are still tied to it. Despite some recent setbacks Nokia has been able to maintain its good position in global competition, and to a limited extent can in- fluence developments in the market place. However, the fact remains that the whole sector is in turbulence. The Finnish economy is also facing an aging population and increasing needs for flexibility in the labor market. The working population will inevitably start to decline in only a couple of years. This will weaken one of the economy’s most important competitive advantages as the growth of a highly educated labor force slows down. At the same time, the labor market needs to cope with firms’ intensifying relocation of production activities to low labor-cost countries. One of 32
  33. 33. the few weapons in the fight for retaining domestic jobs is a rich deposit of high- skilled labor. What can be learned from the Finnish experience? It seems that a deep crisis often precedes considerable and lasting shifts in economic and social structures. In general, people seldom have a desire to take great leaps forward into the un- known, but a crisis may bring about a willingness to accept the inevitable. The Finnish response to the most recent crisis was to open up the economy, modernize social structures, strengthen public R&D finance, and shift policies from direct business involvement to building framework conditions for private business. Moreover, it appears that small countries with greater homogeneity and closer interaction (networking) among economic agents may well have an advan- tage in adjusting to new technologies and, hence, in generating economic growth in certain situations. This is a kind of a small country paradox, since most of the economic literature (including new growth theories) suggests that larger countries grow faster than smaller ones, and should thus achieve higher levels of income (see Lundvall 1999). The rapid turnaround of the Finnish economy would not have been possible without the rise of the ICT cluster, which in turn was facilitated by the conver- gence of a number of factors. Unfortunately we cannot perform real world experi- ments to see what would have happened in a different environment, but it is our belief that even slight changes in events or their timing would have made a big difference.18 In fact, the history of Finnish ICT-related policymaking seems to be full of right decisions made at the right time, but unfortunately, they have mostly been made for the wrong reasons. For instance, the political wrangling over GSM licenses did not even touch upon the economic and social benefits that would be gained by competition and early adoption of digital mobile telephony.
  34. 34. The case of Finland is a good example of the interaction of several inter- twined growth-generating factors. Therefore, the Finnish model cannot probably be replicated as such. One thing is sure, however: Integral to Finland’s emergence as a global wireless player has been the long-term strategic perspective of educa- tion and innovation policies. These policies were relatively consistent over the long term and were not significantly dictated by short-term cyclical or political considerations. Thus, the fact that Finland was a well-positioned knowledge econ- omy when the wireless opportunity arose had nothing to do with luck. 34
  35. 35. References Ali-Yrkkö, J. 2003. “Nokia—A Giant in the Finnish Innovation System.” In G. Schienstock, ed., Catching Up and Forging Ahead: The Finnish Success Story. Albershot, Hants, UK: Edward Elgar. Ali-Yrkkö, J. and R. Hermans. 2002. “Nokia in the Finnish Innovation System,” ETLA Discussion Papers No. 811 Helsinki: The Research Institute of the Finnish Economy. Berggren, C. and S. Laestadius. 2003.” Co-development and Composite Clusters-The Secular Strength of Nordic Telecommunications”, Industrial and Corporate Change, Vol. 12, No. 1, pp. 91-114. Castells, M. and P. Himanen. 2002. The Information Society and the Welfare State—The Finnish Model. New York: Oxford University Press (Sitra 250). Dutta, S., Lanvin, B., and Paua, F.(eds.). 2003. The Global Information Technology Report 2002-2003: Readiness for the Networked World. New York: Oxford University Press. European Union. 2000. Towards a European Research Area. Brussels: European Commission (COM (2000)6). Gao, M, Hyytinen, A. and Toivanen, O. 2004, Demand For Mobile Internet: Evidence From a Real-World Pricing Experiment, mimeo, The Research Institute of the Finnish Economy (ETLA). Georghiou, L., K. Smith, O. Toivanen, and P. Ylä-Anttila. 2003. Evaluation of the Finnish Innovation Support System. Helsinki: Ministry of Trade and Industry (Publications 5/2003). Häikiö, M. 2001a. Nokia Oyj:n historia, vol. 1, Fuusio. Helsinki: Edita. ———. 2001b. Nokia Oyj:n historia, vol. 3, Globalisaatio. Helsinki: Edita. ———. 2001c. Nokia Oyj:n historia, vol. 2, Sturm und Drang. Helsinki: Edita. ———. 2002. Nokia: The Inside Story. London: Prentice Hall (for Financial Times). Hernesniemi, H., M. Lammi, and P. Ylä-Anttila. 1996. Advantage Finland: The Future of Finnish Industries. Helsinki: Taloustieto (ETLA B 113, Sitra 149). Hjerppe, R., R. Hjerppe, K. Mannermaa, O. E. Niitamo, and K. Siltari. 1976. Suomen teollisuus ja teollinen käsityö 1900–1965. Helsinki: Bank of Finland. Honkapohja, S. and E. Koskela. 1999. “The Economic Crisis of the 1990s in Finland,” Economic Policy 14, no. 29, pp. 399–436. Hyytinen, A. and M. Pajarinen, M. 2003, “Financial Systems and Venture Capital in Nordic Countries: A Comparative Study”, in: Financial Systems and Firm Performance: Theoretical and Empirical Perspectives (eds. A. Hyytinen and M. Pajarinen), ETLA B-200, Publisher: Taloustieto Ltd, Helsinki, 2003. ———. 2004. “Financing of Technology-Intensive Small Businesses: Some Evidence of the Uniqueness of the ICT Industry”, Information Economics and Policy, forthcoming.
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  38. 38. 1. Figures and Tables Figure 1GDP Volume in Finland and OECD (in 1995 prices and purchasing power parity exchange rates) 25000 23000 21000 19000 17000 Finland 15000 OECD-Europe 13000 11000 9000 7000 5000 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 Source:, Penn World Tables Figure 2Finnish Manufacturing Production Volume by Industry (€billions in 2000 prices) 9000 8000 7000 6000 Textiles & apparel Chemicals 5000 Pulp & paper 4000 Electronics & electrical eq. 3000 Metal & engineering 2000 1000 0 1952 1972 1992 1948 1956 1960 1964 1968 1976 1980 1984 1988 1996 2000 Sources: ETLA database, Hjerppe et al.(1976), National industrial statistics by Statistics Finland
  39. 39. Figure 3R&D Intensity in Finland Gross domestic expenditure on R&D 4,5 4 3,5 3 Finland Sw eden 2,5 USA 2 Japan (adj.) 1,5 EU 1 0,5 0 4 81 87 90 93 96 99 02 8 19 19 19 19 19 19 19 20 Source: OECD Main Science and Technology Indicators Vol. 2003 release 01 Share of Communications equipment manufacturing (ISIC 32) in total business enterprise R&D 60.000 50.000 EU11 40.000 USA 30.000 Japan Finland 20.000 Sweden 10.000 0.000 87 89 91 93 95 97 99 01 19 19 19 19 19 19 19 20 Source: OECD R&D Expenditure in Industry (ISIC rev.3) Vol.2002 release 01
  40. 40. Figure 4Finnish Postgraduate Degrees in Natural Sciences and Engineering 900 800 700 600 500 400 300 200 100 0 1951 1957 1960 1963 1966 1969 1972 1978 1981 1987 1990 1993 1996 1954 1975 1984 1999 Source: KOTA OnLine ( Figure 5Nokia’s Sales by Industry 100% 90% 80% Rubber 70% Forest 60% Cable 50% Other 40% TVs 30% Networks 20% Phones 10% 0% 80 82 84 86 88 90 92 94 96 98 00 02 19 19 19 19 19 20 19 19 19 19 19 20 Sources: Derived by the authors form an earlier version by Paija (2001, p. 27) with additional data from Häikiö (2001b) and Nokia’s annual reports
  41. 41. Figure 6Finnish ICT Cluster Shares of GDP, Exports, R&D, and Employ- ment 60 % 50 % Value added: ICT cluster / GDP 40 % Employment: ICT 30 % cluster / Total Export: ICT equip. / 20 % Total 10 % R&D: ICT / Total business 0% 90 2 4 6 8 0 02 9 9 9 9 0 19 20 19 19 19 19 20 Note: See endnote 11 for ICT cluster definition Source: OECD: STAN and ANBERD, ETLA database Figure 7Contribution of Nokia and the Electro-Technical Industry to GDP Growth in Finland (percentage points) 3.0% 2.5% 2.0% 1.5% Nokia's contribution (percentage points) Electro-technical industry's 1.0% contribution 0.5% 0.0% 2E 97 98 91 92 93 94 95 96 99 00 01 19 19 19 19 19 20 19 19 19 19 20 0 -0.5% 20 Source: ETLA updates of Ali-Yrkkö and Hermans (2002)
  42. 42. Table 1 Market Shares in NMT Handsets in 1985 (83,525 units in total) Mobira (Finland) 25.7% Ericsson (Sweden) 16.9% Panasonic (Japan) 8.9% Storno (US, until 1977 Denmark) 7.1% Dancall (Denmark) 6.5% Mitsubishi (Japan) 6.1% NEC (Japan) 6.0% Siemens (Germany) 5.6% Motorola (US) 5.6% Simonsen (Norway) 2.3% Source: Nokia Mobile Phones (as cited in Häikiö 2001c, p. 134; countries of ori- gin added by the authors) Table 2 Nokia in Figures 1992 2002 Market value (€ billions) 1,028 72,300 Net sales (€ billions) 3,056 30,016 of which abroad (%) 80.0 98.8 Profit margin (%) 1.7 19.0 Employment 26,770 52,700 of which abroad (%) 48.6 57.1 R&D expenditure per net sales (%) 6.1 10.2 of which abroad (%, authors' estimates) 30.0 35.0 Source: Top500 database by Talouselämä business periodical, Nokia’s annual re- ports, ETLA estimates
  43. 43. Endnotes
  44. 44. 1 See, for example, Kiander and Vartia (1996) and Honkapohja and Koskela (1999). 2 It even became labeled as a country where “. . . the 21st century is in beta” (Wired magazine, September 1999). 3 Recall that from the 13th century until 1809 Finland was under Swedish reign, after which it was a semi- autonomous grand duchy of Imperial Russia until it gained independence in 1917. Already in 1906, Finland ob- tained a parliament in which–after a national struggle–all societal groups were represented on the basis of formal equality. During World War II Finland was at war against the Soviet Union, which ended in Finland’s armistice and the payment of heavy war indemnities that contributed ultimately to the rapid industrialization of the Finnish economy. 4 Finland ranked second in the frequency of collaborative arrangements between business and the public sector, applying to over 40 per cent of firms (OECD 1999). 5 In many ways, Finland can be characterized as a “network society” (see Castells and Himanen 2002). Of course, social networks, often labelled social capital, can become too tight and finally an obstacle for change and industrial transformation. Thus far, however, networking and cooperation have been an advantage rather than a disadvantage in Finnish industrial development. 6 Coincidently, in the very same year, Eric Tigerstedt, a Finnish inventor who was well ahead of his time, at- tempted to patent a ‘pocketsize folding telephone with a very thin carbon microphone’. 7 Important additional demand, in terms of both learning and sales revenue, came from Soviet authorities, which appreciated not only Finnish technical innovativeness and flexibility, but also their political neutrality in the post-war era. 8 Weighing approximately five kilograms, the original NMT terminals were not quite the handsets of today. 9 In 1986 Nokia had 10 divisions, 45 business units, and 180 lines of business. 10 According to a Nokia director Kari-Pekka Wilska, the Tandy cooperation considerably enhanced the compa- ny’s customer orientation. In the leading Finnish daily newspaper Helsingin Sanomat (7 April 2002, p. E3—in Finnish, translated by the authors), he notes: “We had a Finnish engineer’s mindset. As a major distributor of consumer products, Tandy’s view was totally different. . . . We learned that even though the product can com- mand a high price in the market place, it does not have to be expensive to produce.” 11 In terms of ICT employment as a share of business sector total, and ICT-related R&D relative to GDP Finland ranked number one in 2000. In ICT value added as a share of business sector total Finland ranked second behind Ireland whose ICT-production based largely on foreign outsourcing (OECD 2002b). 12 We approximate the ICT cluster with the following NACE industries: 30 office, accounting and computing machinery, 32 radio, TV and communications equipment, 64 post and telecommunications, 72 computer and re- lated activities. 13 Nokia electronics, established in 1960, resold computers, provided computing services, and also manufactured some of its own electronic devices. Sales were modest, but the 1960s may be seen as an era of competence building in digital technologies. The real breakthrough and expansion came in the 1970s. In 1972 Nokia signed a contract to deliver a large computer system for the Loviisa nuclear plant. In 1973 Nokia decided to start its own computer manufacturing after a major order from a local bank (Kansallis Banking Group). In order to capitalize on accumulated computer expertise and to leverage its phone cable business, Nokia became involved in fixed- line digital telecommunications by acquiring a license for a central telephone exchange from CIT-Alcatel in 1976. Its own (in part developed at Televa) digital exchange, the now legendary DX200, was introduced in 1982. It was based on a standard Intel microprocessor and was thus easily programmable and upgradeable. With its distributed processing power, all-digital silicon architecture, and industry-standard components and program- ming language, it went against prevailing beliefs about telecommunications. DX200 was amazingly profitable in fixed networks and later formed the foundations of Nokia’s wireless network systems. With altogether two thou- sand man-years of R&D effort spanning over ten years (Keijo Olkkola, as cited in Häikiö 2001a, p. 275), it may be the biggest single R&D project in Finnish history (see also Palmberg 2002). 14 The best-known example of non-commercial pursuits is the open source software Linux that today challenges the predominance of Microsoft. The revolutionary operating system, which today includes contributions of thou- sands of programmers, was initiated by a 22-year-old student Linus Torvalds in 1991 whose original objective was to understand task-switching operation. Next year, Linux was combined with US-based open software, GNU, to produce a complete free operating system. Another widely spread Internet application, the real-time chat environment (Internet Relay Chat, IRC), was also originated in a Finnish university classroom. Further- more, the first Internet information browser with a graphical user interface that was created by a group of
  45. 45. Finnish students in 1992 – a year before Mosaic was released by the National Center for Supercomputing Ap- plications at the University of Illinois, US. The students, however, shelved the software in the lack of business interest. Another invention in the category of “missed Internet business opportunities” include the router, con- necting local and general networks, that was created by Nokia’s engineers in 1983, before Cisco, but neglected at the expense of modem development. Some of the student-initiated inventions have grown into viable businesses, particularly in the domain of secure network solutions (e.g., SSH Communications Security Ltd, F-Secure Ltd), but even the most successful internationally operating companies fall into the class of small and medium-sized enterprises. 15 The non-telecom ICT market was also booming at the time the Finnish ICT cluster grew. The geographically dispersed multinational enterprises had new demands for ICT-related equipment and services. Rapidly falling equipment prices boosted both business and consumer use. The Internet went mainstream in the mid 1990s. 16 The name Nokia became the centerpiece of the company’s branding strategy in 1991. Relatively early, “life- style consumption”, as opposed to, for example, technological excellence, became the focal point in branding. A decade later, Nokia had become the strongest brand in the mobile market and one of the ten most valuable brands in the world. 17 Maliranta and Rouvinen (2003) use firm-level data to study the effects of ICT usage. The average effect in Finland is almost exactly the same as the mean estimate calculated across tens of similar international studies. There is, however, huge variation across firms. 18 For instance, had the remaining bits and pieces of the Finnish communications sector, deregulated and liberal- ized from 1988 to 1994, been opened up a few years earlier, later, or even in a different order, the situation would have been quite different. If, for example, Radiolinja had built an analog NMT network or, along with PTO, postponed its GSM introduction a few years, Nokia’s international GSM premiere and a progressive mar- ket as a homebase would have been endangered. Had Finland not experienced the recession, there would have been fewer resources targeted to the at-the-time uncertain ICT business. Other aspects of recent developments provoke similar thought exercises and conclusions.